Over the past few weeks, better-than-expected unemployment numbers and improved profitability announcements from well-known companies indicate that the US economy may be coming out of its pandemic funk.
While all of this positive momentum is really great to see, it does foretell of a long, dormant, crippler-of-wealth that many economists feel is ready to emerge — inflation.
Many small-business owners and large companies alike are starting to see the impacts of an inflationary environment. Most business people under the age of 50 have not seen a truly inflationary business environment because our macro-economic policies have been focused on limiting the effects of higher prices as its primary objective for some time.
However, the pandemic has had a far-reaching effect on inflation, primarily as a result of the government programs designed to minimize the negative impact on household wealth for US citizens. These spending programs, however, come at a price. The extra money that is currently being spent by the government will result in high prices for commodities and services alike and, most likely, will force the US government to increase tax rates for individuals and businesses as well.
Small-business owners are currently impacted by higher prices in their supply chains. According to a new survey of 10,000 businesses, conducted by Goldman Sachs and reported first by DealBook, 82% of small-business owners are concerned about inflation, and 83% have experienced an increase in operating costs in the past few months. Many small businesses are also experiencing the effects of delayed shipments due to shortages. With so many companies rushing to restore their capacity at the same time, larger delays and higher prices ensue.
Experts are predicting that this will continue for at least the next six months. So expect pricing of basic goods to continue to rise! For example, the cost of wood and sheetrock have caused many planned projects to have as much as 25% of their expected costs added over the past two months.
Because of the need to increase production, companies are also looking to hire as quickly as they can. And with more companies going after a relatively small labor pool, the result is a rise in labor costs to meet growing demand. And if there are growing costs both in costs and in production costs, the only way a business will be able to maintain its profitability is to pass the rising costs onto its consumers.
Many factors point to a higher inflation rate than we have seen in the past 20-30 years. As smart business owners and entrepreneurs, we need to start planning for these price increases and figure out how to maintain cost-to-profitability while incurring incremental costs. From the CFO’s perspective, we’ve identified three key steps to stay ahead of the impending inflationary costs:
Forecasting the Remainder of 2021 with Higher Costs: Now is the time to start planning for rising costs in your production cycle for the remainder of the year, at least. You also need to account for potential delays (if you haven’t already started seeing them) and anticipate how these constraints in resources will impact your profitability and revenue earned by the end of the year.
Start Negotiating with Suppliers Now: If you have a longer production cycle in your particular goods or service or if you have one or two key components that are critical to your finished goods, you should start negotiating purchases and minimum purchase requirements now. With production cycles and a growing global supply chain that can be easily impacted by any single potential event around the world, finding the potential soft spots in your supply chain is imperative. By identifying and minimizing risk, you can minimize the impact on your company.
Review Your Pricing: Most consumers will balk at an immediate price jump in its goods and services. However, if planned carefully, a staged price increase over a period of six to nine months can lessen the impact. In addition, by staging price increases in smaller increments over a longer period of time, you can analyze what impact it will have on your customer’s behavior and will allow you to strategize future increases. The key message is to get ahead of the price increase and not put yourself in a situation where cash flow could be significantly constrained.
Takeaway: Inflation is a topic that has not had a significant role in business operations for the past few decades. For a free review of your company’ financials and the safeguards to fight back against anticipated inflation, reach out to Brian and Scott at email@example.com.
Co-founders & Managing Partners